Australian banks have been stress tested both by regulators (AirDaily yesterday’s report) and by the stockmarket since the credit crunch started.

And they have passed the real tests, but been marked down by the nervous market which has been more focused on overseas sentiment (and helped by short sellers).

We will need our healthy banks if the $US700 billion should fail to pass the US Congress in the next few days and markets shudder. But is heading for approval, according to the latest reports.

There’s a great deal of fear and loathing abroad, especially since the collapse of Lehman Brothers (which is looking more and more like a major catalyst).

The Reserve Bank has constantly pointed out that the Australian banking system is sound, with little if any of the impact here that we have been seeing in countries like the US or UK.

But as the bank said, we are not immune there has been more upward pressure on interest rates as cash has gotten tighter.

Our banks are well capitalised, have low levels of bad debts and impaired assets while individuals and businesses have voted with their wallets by dumping billions of dollars of cash into the banks in short and longer term deposits.

But investors have taken a more jaundiced view.

The RBA points out that the banking sector on the ASX has fallen to be around 32% below its peak in November last year (when the ASX peaked).

There has also been a very pronounced increase in the volatility of bank share prices since mid 2007 with the daily absolute movement in the banking index averaging 2.3% over this period, compared with an average of 1% over the previous 10 years.

The largest movements occurred in July (of this year) , when the banking index fell by around 15% over three days, after the market was surprised by a couple of banks announcing higher provisioning charges.

The RBA points out that the fall in the Australian banking index since its peak has, however, been slightly less than the falls in the European and US banking indexes since their respective peaks, with these markets having declined by about 40%.

“Over a longer horizon, Australian banks have significantly outperformed many of the international peers.”

The bank pointed out that the share prices of the companies included in the ASX ‘diversified financials’ index have been more volatile than for Australian commercial banks, with the relevant index declining by around 60% since its peak mid last year.

“The movements in banks’ share prices have resulted in significant changes in market-based valuation measures, with the banks’ price/earnings ratio falling to its lowest level since the mid 1990s and dividend yields rising equivalently.

“Each of the four largest Australian banks is rated AA by Standard & Poor’s, with these ratings having recently been affirmed. Of the world’s largest 100 banks, only a handful have higher ratings. 

“Moreover, unlike some of the large financial institutions abroad, no Australian-owned bank has had its rating downgraded since the onset of the credit turmoil. 

“A couple of foreign-owned banks operating in Australia have had their ratings downgraded,” the RBA pointed out.

“In this difficult environment, Australia has benefited from having strong and profitable financial institutions with few problem assets on their balance sheets, and a sound regulatory regime. 

“While the Australian financial system has not been completely insulated from developments abroad, it is weathering the current difficulties much better than many other financial systems,” The central bank said yesterday in its bi-annual Financial Stability review, released yesterday.

And, yet there’s a cash drought as the banks are nervous, prefer to keep billions of dollars in accounts at the Reserve Bank and are reluctant to lend to anyone. 

Short term money market rates are spiking and if the RBA doesn’t cut rates next month, we could be facing rate increases from banks nervous about their funding levels.

Several banks have already revealed high bad debt provisions, such as the ANZ and the National, which has provided over a $1.1 billion for possible losses on CDOs.

The Reserve Bank said that these higher charges are likely to see the banking system’s aggregate post-tax profits fall in the near term, “with analysts generally anticipating that the aggregate profits of the five largest banks will be around 10 per cent lower in the second half of 2008 than in the same period a year ago.

“If this were to occur, the annualised post-tax return on equity over this period would be around 16 per cent which, while lower than the average return over the past decade, would be much higher than that being earned in many other banking systems around the world and many other industries in Australia.”

“While provisioning charges have increased, the Australian banking system continues to experience a low level of problem loans. As at June 2008, non-performing assets accounted for around 0.7 per cent of banks’ on-balance sheets assets, which is below the average since the mid 1990s.

“Only around half of the non-performing assets are classified as ‘impaired’, in that payments are in arrears by more than 90 days (or are otherwise doubtful) and the outstanding amount is not well covered by the value of collateral. (See the two graphs at the start of this story).

“Although the non-performing assets ratio is low, it has nonetheless increased over the past six months, with the rise evident across all the main segments of the domestic loan portfolio.

“The most notable increase has been in the non-performing business loan ratio, with this increase largely accounted for by a small number of exposures to highly geared companies with complicated financial structures and/or exposures to the commercial property sector. In banks’ commercial property loan portfolios, the impaired assets ratio stood at 0.9 per cent as at March 2008 (the latest available data), up from the unusually low levels of recent years.

(That’s a reference to the likes of Centro Properties, MFS, Allco and a group of smaller property financing companies).

“Much of the recent rise has been accounted for by loans for residential development and, particularly, retail property, with no apparent rise in the arrears rate on loans for office property.

“In the mortgage and personal portfolios, non-performing loan ratios have also risen, but remain around, or only slightly above, their levels of a year ago. 

“As at June 2008, non-performing housing loans accounted for 0.4 per cent of Australian banks’ outstanding onbalance sheet housing loans.

“For credit unions and building societies, non-performing housing loan ratios are slightly above their levels in June 2007 but, in aggregate, are below the level in the banking sector.

“The modest increase in housing loan arrears rates over recent years was not unexpected given the increase in financing costs for borrowers, and the easing of credit standards that took place over the past decade.

“Importantly though, this easing of standards was not nearly as marked as that in some other countries, most notably the United States. Reflecting this, the non-conforming housing loan market in Australia (the closest equivalent to the sub-prime market in the United States) has remained very small, with ADIs having virtually no presence in this market.

“Non-conforming loans account for less than one per cent of outstanding mortgages in Australia – compared with about 12 per cent in the United States – with the vast majority of these loans having been provided by a small number of specialist, non-ADI, lenders.

“More broadly, even on prime housing loans, arrears rates have historically been considerably lower in Australia than in the United States and the United Kingdom.

“As in their Australian operations, there has recently been a modest increase in measures of problem loans in Australian banks’ foreign operations, although again from a low base. 

“Entities in New Zealand account for the largest share of Australian-owned banks’ foreign exposures, at around 40 per cent, with these exposures largely arising through the four largest banks’ New Zealand-based operations.

“These operations continued to account for around 10–20 per cent of the four largest banks’ group-wide profits in the latest half year. US exposures account for less than 10 per cent of Australian-owned banks’ total foreign claims, and typically do not arise through lending to the US household sector. 

“While some banks have reported that they have exposures to the US sub-prime market through holdings of financial instruments, these remain small when compared to the size of these banks’ balance sheets.

“Another factor that has stood the Australian banks in good stead throughout the recent turmoil is that they have traditionally not relied heavily on income from trading activities for profitability. 

“For the five largest banks, trading income accounted for only around 6 per cent of their total income in the latest half year, which is well below the equivalent share for some of the large globally active banks.

“Consistent with this, Australian banks have traditionally had only small unhedged positions in financial markets, with the value-at-risk – which measures the potential loss, at a given confidence level, over a specified time horizon – for the five largest banks equivalent to 0.03 per cent of shareholders’ funds in the latest financial year.

“Reflecting the strong profitability of recent years, the Australian banking system remains soundly capitalised, with the aggregate total capital ratio standing at 10.6 per cent as at June 2008, and the Tier 1 ratio at 7.3 per cent. 

“Similarly, the credit union and building society sectors remain well capitalised, with aggregate capital ratios of 16½ and 14½ per cent, respectively.

“Strong profitability has meant that retained earnings remain an important source of banks’ Tier 1 capital, with issues of preference shares and the dividend reinvestment plans of the five largest banks adding to Tier 1 capital over the past year.”

That’s a clean bill of health, but the pressures from the US are immense and this weekend looms as crucial.

 

 

Markets in the US fell, Asia was lower, and Europe was weak as doubts continued over the US treasury’s $US700 billion bailout plan.

The Dow was down 161.52 points, or 1.47%, at 10,854.17. The Standard & Poor’s 500 Index was off 18.87 points, or 1.56%, at 1188.22 while Nasdaq was down 25.64 points, or 1.18%, at 2153.34.

Worries about the economy saw the US dollar rise again most currencies, especially the euro and the Aussie which traded around 83.10 US cents, down around a cent in a day.

Gold fell $US11 an ounce to around $US897; oil dropped more than $US2.50 to just over $US106.70 a barrel and copper lost 11 US cents to end at $US3.14 a pound in New York.

Our market was off more than 1%, according to the overnight futures market and the ASX/200 could start around 70 points down this morning.

In new York BHP Billion and Rio Tinto shares were weak as analysts saidf iron ore exporters would get smaller than expected price rises next year.

Rio’s American depositary receipts fell the most since at least 1990, losing 13% to $US289.14 and BHP’s ADRs slipped 5.2% to $US61.77.

General Electric was the biggest drag on the S&P 500, falling more than 4%, after Goldman Sachs cut the company’s profit outlook. GE’s fall also hit the Dow. GE had itself added to the uS anti-shorting list.

Downgrades also hurt Bank of America shares, off 2.5%, while energy company shares fell as the price of oil retreated.

More details were made public with US Congressional hearings starting overnight in Washington, but Wall Street didn’t like the debate and delays..

Treasury Secretary, Hank Paulson, President Bush and Fed chairman Ben Bernanke all urged Congress to swiftly approve the plan.

Chairman Bernanke warned that the US economy would contract if the plan was not adopted and adopted quickly.

But there are concerns the Democrats might try to ram through one off pork barrel deals or attempts to control banking salaries, while some Republicans have expressed doubts about the whole idea.

Comments from the head of the Senate banking Committee, Senator Dodd didn’t help sentiment.

He said this morning government economic rescue plan was “not acceptable” in its current state.

“A lot of reservations have been expressed this morning by Democrats and Republicans on this matter,” said Dodd, a Democrat, speaking after Paulson and Federal Reserve chief Ben Bernanke testified in Congress.

“What they have sent to us this is not acceptable,” said Dodd. “This is not going to work.”

Wall Street tumbled more than 160 points after hearing that, going from being slightly up, to well down on the day.

European stock-index futures dropped with Dow Jones Euro Stoxx 50 Index futures off 1.9%

National indexes decreased in all 18 western European markets. London’s FTSE 100 lost 1.9%.

Asian markets ended the sharp two day rally on those doubts about the Paulson plan.

The MSCI Asia Pacific Index (excluding Japan) fell 1.9% with financial shares the big fallers.

Stocks fell around the region, except in South Korea, Taiwan and Malaysia. Markets in Japan are shut for a holiday.

China’s CSI 300 index dropped 3.8%. Hong Kong was off 3.9%.

The Australian share market lost 1.9%, ending the two-session rebound, as doubts grew about whether the $US700 billion ($A840 billion) US financial bailout package would work.

The ASX 200 index ended down 97 points, or 1.9% at 4923.5, after rising 4.5% on Monday.

Australian shares traded lower as regulators announced exemptions to the ban on short selling and detailed proposed legislation to better control it.

At the close the All Ordinaries was down 92.4 points, or 1.8%, to 4957.7.

BHP Billiton fell $1.80, or 4.5%, to $37.90, Rio Tinto dropped $2.76, or 2.5%, to $108.24 and Fortescue Metals shed 64 cents, or 9%, to $6.51.

Banking led the way down with the ANZ losing $1.11 to $18.04, the Commonwealth Bank 38 cents to $44.22, the National Australia Bank 44 cents to $23.86 and Westpac 20 cents to $24.50.

Retailers were mixed, with Harvey Norman adding one cent to $3.51, Woolworths dropping 52 cents to $27.01, Wesfarmers retreating 57 cents to $31.18 and David Jones falling one cent to $4.39 ahead of the release of its full year results later today.

Media was mixed, with Consolidated Media Holdings adding three cents to $2.75, Fairfax falling 13 cents to $2.85, News Corp shedding 71 cents to $15.78 and its non-voting shares losing 70 cents to $15.51.

Telecommunications provider SP Telemedia lost one cent to 14 cents after reporting a full year loss of $18.93 million following debt write-offs, and cut its earnings guidance for the new year. 

It’s part of the Washington Soul Patts group whose 61% owned subsidiary New Hope Corp losing six cents to $4.40 despite forecasting significant earnings growth this year and delivering a rise in annual profit to $90.68 million

Santos added 17 cents to $18.70; Woodside dropped a cent to $56.99 and Oil Search lost nine cents to $5.53.

The spot price of gold was higher was trading at $US891.30 an ounce by late yesterday, up $US20.15 on yesterday’s local close of $US871.15 an ounce.

Gold miners were stronger, with Newcrest adding $1.34 to $26.84, Lihir 12 cents to $2.77 and Newmont 16 cents to $5.15.

Telstra was the most traded stock on the market, with 42.05 million shares changing hands, collectively worth $172 million. Its shares rose 16 cents to $3.98.

 

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And in a report issued this morning, the International Monetary Fund says Australia is well placed to withstand the credit crunch.

In particular, the report notes that IMF “Directors welcomed the support that prudent fiscal policy is providing for monetary policy.”

The IMF Executive Board considered that Australia’s banking system remains resilient, with stable profits, high capitalisation and few non-performing loans. 

This was evident in stress tests undertaken by the IMF and presented in their report, which showed that Australian banks are able to absorb ‘extreme’ shocks.

The IMF considers that the outlook for the economy is more uncertain than usual due to large countervailing forces impacting on the economy, with the commodity boom providing a substantial stimulus and the global downturn exerting a contractionary effect. 

IMF staff forecast that real GDP growth will moderate as required to bring underlying inflation back within the RBA’s target range.

On an annual basis the IMF consults with the Australian authorities, private sector economists and academia to provide an independent and comprehensive assessment of Australia’s economic performance. 

This forms part of its program of economic consultations with all IMF member countries.

 

 

American markets fell by up to 4.7% on the S&P 500, London was down, cash dried up around the world, our market could be down sharply at the open and Russia froze.

Overnight futures trading had our market opening more than 3% lower after the terrible day on Wall Street.

US interest rates hit their lowest level at the short end since 1941, according to some estimates.

The Dow closed down 4.1% at a three year low (but ONLY the second biggest fall of the year!).

It was another dramatic day of trading that swept world markets.

A UK bank was forced to find a safe home with a rival and now there’s reports the huge Morgan Stanley investment bank is looking to merge with the Wachovia bank, which has also suffered big losses from subprime released debt. 

Morgan Stanley had revealed a small, 3% drop in its latest quarterly profit, the best from a US bank for months, but that wasn’t enough.

Washington Mutual, the troubled US Savings and Loan was reportedly setting up a process to be sold. It has $US143 billion in retail deposits.

Gold jumped by more than $US87 an ounce to $US868, the biggest rise in nine years; oil rose $US6 a barrel to more than $97 a barrel as investors sought protection from stockmarkets.

US interest rates plunged, but in the commercial markets, there was no money available: 10 year bonds fell to 3.41% in New York dealing, the two year bond to a yield of 1.64%, but three month Treasury notes fell to a range of 0.40% to 0.70%, the lowest for decades. 

European markets were higher early, but slumped as banks were hammered. The US was down all day and Asian markets ended lower after early gains on the back of the US Federal rescue’s bailout of AIG.

But in London shares in HBOS (which owns BankWest here) fell more than 30% yesterday in early London trading amid concerns about its reliance on wholesale funding after Lehman Brothers’ collapse.

HBOS and Lloyds TSB later revealed they were in merger talks as the pressures grew on HBOS to be taken over of collapse. Talks saw agreement on a near $A25 billion merger of the two that seems to have official approval as a way of saving HBOS.

Russia injected $US44 billion into its markets, halted trading for a second day and gave several banks more time to repay previous cash advances.

But that wasn’t enough and trading on the stockmarket was later stopped for a third day, but it didn’t resume.

Russia was forced to close its two main stock exchanges to halt a rout that has led to the steepest declines since the August 1998 crisis.

The two key bourses, Micex and RTS, said they were suspending trading until further notice from the state’s main financial regulator after shares began to fall as a new wave of forced equity sales on margin calls consumed dealings and cash dried up.

Over $US700 billion in value has been wiped off Russian shares and it is the first stockmarket to freeze during the crisis, a situation reminiscent of the country’s default a decade ago last month.

US Government short term interest rates fell to near 66 year lows, short term interbank rates in London soared, and a drying up of finance for bond issues was reported across Europe and the US. Trans Atlantic lending was halted by a surge in spreads that made lending prohibitive.

The Financial Times headline said it all “Panic grips credit markets”.

HBOS is the UK’s largest mortgage lender and its shares have been hit since Lehman imploded, but they opened trading Wednesday in London up 10%, but then they fell sharply and reports emerged of the Lloyds’ talks.

Central banks in Japan and Australia injected $US33 billion into their financial systems to try to calm markets.

The Reserve Bank here pumped in more than $A4 billion in an injection that was of a similar size to those late last year as the credit crunch was erupting.

Asian financial shares fell as the bailout of American International Group failed to ease concerns that credit-related losses will cause more financial failures.

The US Securities and Exchange Commission banned naked short selling again (a bit late perhaps, after relaxing it a month ago after a month long ban).

In Australia, Macquarie Group fell more than 7% even after denying a newspaper report that the company may face difficulty in refinancing debt

It was a four year low for Macquarie.

Finance stocks weakened after CNBC reported that Morgan Stanley was considering seeking a merger partner. 

That saw some markets, like Australia’s turn and spreads on Morgan Stanley debt widen as investors fretted about another investment bank. 

Morgan Stanley had brought forward its latest quarterly earnings by a day and revealed a drop in profit of just 3%, the best by an American group for months.

Tokyo rebounded from Tuesday’s sell down: The Nikkei rose 1.2%. But China’s CSI 300 Index (which tracks yuan-denominated A shares listed on China’s two exchanges) dropped to a 21 month low.

It fell 3.6%, to 1,929.14 at the close, the lowest close since late December 2006. Hong Kong’s Hang Seng Index lost 2% after rising early.

In Australia shares ended a roller-coaster day in the red with the ASX200 index off 0.6%, or 28.6 points at 4722.2.

The market clawed back about one-third of its losses from Monday and Tuesday, banks fell in the early afternoon as worries resurfaced and that CNBC report was circulated about Morgan Stanley.

The Commonwealth Bank fell 1.5% to $41.08 and the National Australia Bank fell 2.3% to $21.40.

Falling oil and metals prices hit the miners. Rio Tinto fell 2.2% to $104.47 and BHP Billiton fell 0.3% to $36.28.

 

 

It’s hard to feel sorry for a bunch of investors in the US and here who think things are getting better.

For example, in just 24 hours Wall Street went from boom, as the economy surges on export drive, to the grim reality that US consumers are not spending: exports might account for around 19% of the US economy at most, consumers for upwards of 70%, the strength is with consumers.

Wall Street finished August with a thump, we finished with a bang and and on Monday, with the US on holiday on Monday night, things will go sideways. But there could very well be a thump here as chartists were claiming the US was becoming more bullish.

Did anyone notice that the 10th US bank went bust over the weekend: it was small, just over $US1 billion in assets: the 9th was the week before. That’s going to refocus attention on the still weak US financial sector.

Oil and commodities took a pounding Friday and in August.

Japanese inflation surged over 2%, the highest in a decade and the Government revealed a $US105 billion stimulus package Friday night. Indian economic growth sagged, hitting a three and a half year low, with inflation still high.

In Britain, UK house prices sagged by more than 10% in the year to July and the country’s Chancellor of the Exchequer (Treasurer), Alistair Darling said the country’s economic state was the worst in 60 years. 

It was a very gloomy end to a week and a month where many investors started believing that the bottom had been reached and the worst of the volatility was over.

Far from it for the US, Japan, Europe and the UK: in Australia; despite the $5 billion or more in red ink that flowed Friday as the boom losses flooded the market, there was a feeling that perhaps things had overshot.

Our market rose 3.2% in August, and it was all down to the performance last week which turned a losing month into a winner. The market rose around 4.1% last week.

Earnings for June 30 companies outside financial and property. Infrastructure sectors seem to have been solid, but there were some nasty losses among smaller commodity companies and the $A31 billion in earnings from Rio Tinto (interim) and BHP Billiton (final) does distort the figures.

This week’s interest rate cut won’t help or hinder sentiment: banks, builders and building suppliers have all seen improvements in prices since it became apparent a month ago that rates were coming down.

In the US the poor consumer spending figures for July (despite a rise in consumer sentiment) saw the markets all but reverse Thursday’s optimistic bounce. 

The Standard & Poor’s 500 fell 17.85 points, or 1.4%, to 1,282.83; the Dow lost 171.22, or 1.5%, to 11,543.96 and Nasdaq dropped 2%, or 44.12 to 2,367.52.

The S&P 500 gained 1.2% in August, breaking a two- month retreat; the gain was fueled by a more than 20% drop in oil which boosted car companies, retailers and those companies supplying them. There was also some improvement in a wide spread of US financial stocks.

For the month, though, the Dow added 1.5% and Nasdaq rose 1.8%.

It was only the S&P 500’s third monthly advance since reaching a record 11 months ago in October, 2007. It is still down 13%.

The Australian share market closed higher on Friday, driven by gains in the financial sector. The benchmark ASX200  index was up 69.1 points, or 1.4%, to 5,135.6, while the All Ordinaries rose 72.2 points, or 1.4%, to 5,215.5.

But after Wall Street’s fall on Friday, the futures market has our market opening down around 29 points. But traders will play it safe with the US closed for the Labor Day holiday.

For August the best stocks in the ASX 200 were Resmed, up 36%, Spotless, up 28.6% (after a 25.6% rise last week in the wake of an average profit). PMP was up 27.8%, CSR, 27.5% as investors factored in positive news from the interest cut for its building products businesses and Billabong rose 27.3% after a solid annual result.

The dogs were dominated by the Babcock and Brown groups: B&B Power lost 88.8%, BNB itself shed 62.3%, B&B Infrastructure, 37.2%, Great Southern, 30% and  Gunns shed 29.3%.

Oil fell 6% and the Australian dollar shed more than 8.5% to close around 85.60 US cents in New York early Saturday, compared to more than 93.70 US cents at the start of August.

That has helped taken the pressure of many exporters, but has clipped the fall in oil and petrol prices, reversing the way that the stronger dollar soften the blow of record oil and petrol prices earlier in the year.

European stocks rose for a fourth day on Friday with the Stoxx 600 Index erasing August’s losses to finish up 1.6% for the month.

London’s FT 100 rose 0.3% on the day and finished with its first monthly gain since April.

German and French indexes were also higher.

The Footsie rose 2.4% last week (despite more gloomy news on housing and economic growth) and it finished up 4.2% for the month, the biggest rise among the world’s 20 major indexes.

Asian shares also finished on a solid note.

Australia of course rose on the day, the week and the month, while the MSCI Asia Pacific Index finished up 3% on the week, the first weekly gain since late July.

It’s still down 21% over the year so far.

The Nikkei in Tokyo finished higher on the day and the week but was down 0.7% for the month

In Hong Kong the Hang Seng index rose 4.3% over the week, but was still off 6.6% in the month. India’s BSE index rose 4.5% over the week. China’s markets were down for a 5th successive week last week. although they were higher on Friday.

 

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The AMP’s Dr Shane Oliver says that the Australian June half profit reporting season has now effectively wrapped up and while the results over the last week had a somewhat better tone, the broad themes were of basically flat profits overall, a low proportion  of companies surprising on the upside and caution regarding the outlook.

For the first time since earlier this decade more companies came in below expectations (29%) than came in above (27%). 44% of results were in line with expectations which is well up on an average of 27% of results in line over the previous four years. See the top chart.

Resources stocks generated the strongest upside surprises whereas the key sectors to disappoint were diversified financials, consumer services and utilities.

More significantly though, there have been more  companies with cautious or outright negative outlook comments than with positive comments whereas back in August last year the ratio of positive to negative outlook comments was running at 12 to 1.

The bottom  line is that profit growth for 2007-08 was close to flat and analysts’ earnings growth expectations for 2008-09 have been revised down further.

Other themes flowing from the reporting season have been a mixed picture for margins, rising interest costs, the negative impact from the strong $A.

The great credit crunch monster has struck again on two continents: pushing those desperate twins, Fannie Mae and Freddie Mac to the edge for the second time in six weeks in the US, and finally crunching financial engineer, Babcock and Brown in Australia, sending chairman, Jim Babcock into early retirement and CEO, Phil Green to the backbench.

We will look at the situation with the twin basket cases of US mortgage finance shortly, but yesterday’s announcement from the embattled investment bank and financial engineer marked the end of the first round.

BNB shares ended a big day down sharply, $1.23 to a new all time low of $2.22. The 35.6% fall on the day understandable given the news of the changes and the poor state of the company’s finances.

In contrast its troubled affiliate, Babcock and Brown Power, the source of much of its parent’s recent woes with big debts, write downs of $452 million and falling distributions, saw the price of its securities rise 2 cents to 18 cents at the close.

BNB shares have shed more than 90% in value so far this year as talk of problems, losses, instability and growing investor distrust have taken their toll.

CEO Phil Green has been replaced by Michael Larkin, the chief financial officer, while Jim Babcock, chairman and founder, is being replaced by Elizabeth Nosworthy.

She was chairman of Commander Communications which went belly up owing over $300 million a fortnight ago. She was deputy chairman of BNB, so she’s has as much responsibility for the problems as Mr Babcock and Mr Green.

BNB is to unveil the result of a strategic review in the near future (it still “has a way to go” was the timetable in yesterday’s documentation), which is expected to recommend that the company re-organise itself as an alternative asset manager and increase its focus on real estate and leasing as well as infrastructure investment.

That’s all a bit late, and all a bit like Allco Finance Group, which fell over earlier in the year and is now in deep negotiations with its banks.

Allco reports next week and losses of $1 billion and a bit more are expected from that disaster.

We will also hear from Centro Properties and Centro Retail in the next week and those two victims of the credit crunch monster will produce losses in the hundreds of millions of dollars.

BNB said net profit for the six months to June 30 fell 34% to $211.08 million, in line with its recent wide guidance of a fall of between 25% and 40%. The company repeated that it did not expect its full year profit to exceed last year’s figure.

Net profit attributable to the group was $175 million, down 30% from the $250.1 million in the first half of 2007, when times were good and credit easy.

The result included the impact of non-cash impairment charges of $386 million and realised trading losses of $55 million across its four divisions.

Net revenue for the half, excluding impairment charges and asset revaluations, was $764 million, up 31%.

“As previously advised, the group 2008 NPAT is not expected to be above the 2007 group NPAT of $643 million,” it said and the actual result depends on market conditions, assets sales, the execution of its 2008 transaction pipeline and its progress on a restructuring and cost cutting program.

“The volatile global capital market conditions have made and continue to make business conditions uncertain and forecasting in the short term difficult,” Mr Larkin said.

“The environment has created a number of challenges for the group, which we are actively working through at the current time to reach resolutions which endeavour to weigh the interests of all stakeholder groups.”

BNB also said that as part of a strategic review of its business it planned to wind down its corporate and structured finance division.

“The corporate and structured finance division will gradually be wound down,” Mr Larkin said.

“Other assets and businesses not within the key areas of focus will be kept under review and divested or wound down as appropriate to maximise shareholder value.”

Its existing private equity funds - BBDIF and BBGP - will continue to be managed by the group and have access to its co-investment pipeline.

B&B Communities Group, B&B Capital Ltd and BBGI will continue to be managed by the group and will pursue strategies to maximise value for investors, said Mr Larkin.

“As a matter of prudence, no dividend will be paid until sufficient progress has been made on corporate debt reduction,” it said.

And in a burst of confidence, the company says that dividends are expected to re-commence in calendar 2009.

 

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In the US a far more dangerous game is being played with the shares of Fannie Mae and Freddie Mac.

Is it a coincidence that a week after the ban on naked short selling on Freddie Mac and Fannie Mae (and 17 other US banks and financial groups) the troubled quasi-US Government backed mortgage giants, that both are now back under pressure?

Probably not, but it’s convenient to blame the shorts for the emerging train wreck that is Fannie and Freddie.

Very soon, the US Government will be forced into some sort of bailout. It is coming, very quickly and the sharks in the credit markets sense that.

But has the Bush Administration, in its twilight days, the wit and the people to pull off what will be the most complicated refinancing deal the world will see in a long time?

Basically, it has to stop the terrible twins from defaulting on the debt, while allowing them to continue to fund the current meagre amount of mortgage refinancing that they are now carrying out.

The shareholders in both have lost their money; but the bond holders and others have a lot to do if they are to avoid collaterall damage.

It’s probably why US dollar short term interbank rates in Europe persist well above the 2% Federal Funds Rate and 2.25% Fed discount rate. There seems to be a growing fear that another big financial group is having problems.

Fannie and Freddie are the most obvious candidates, after the events of the past three days.

The duo has $US230 billion in debt that has to be rolled over or repaid by the end of next month.

It won’t happen without them paying huge premiums on the debt, which in turn will force up mortgage interest rates, further hurting the depressed housing and finance sectors, and triggering more foreclosures.

All of that six weeks out before the US presidential poll!

An auction of Freddie debt this week exposed this potential explosion: Freddie sold $US3 billion in new debt, but at a margin of 1.13% over the equivalent US government debt rate.

These were five year ‘reference notes’ and the premium means that the hard heads in the credit markets reckon that these quasi-government companies are increasingly risky.

It had been expected that after the passage of legislation through the US Congress formalising the US Government plan to support them, that the debt premiums would gradually settle down.

Far from it and the news of the premium saw Freddie and Fannie shares hit their lowest levels in nearly 20 years, dropping below the levels they bottomed out at last month in the panic that led Treasury Secretary Henry Paulson to propose government-funded ’support’ that later became law when approved by Congress.

So while the US Securities and Exchange Commission ban on naked short selling helped stabilise the market (so it now seems ) while that legislation was put through the US Congress, the deeper problems at Fannie and Freddie are still there for everyone to see.

The ban expired on August 12 with the SEC promising new rules on short selling as soon as possible. The twins’ shares were attacked on Monday, Tuesday and Wednesday in US markets.

The shares in both companies are now down 90% or more from their highs

But it’s not just the shorts that are causing them pain: the credit markets just don’t believe the two when they argue they are well capitalised and investors seem to be challenging the US Government to intervene and back them directly.

According to Bloomberg, Fannie and Freddie have $US223 billion of bonds due by the end of this quarter and their success in rolling over that debt may determine whether they can avoid a bailout.

Fannie has about $US120 billion of debt maturing between now and September 30, while Freddie has an estimated $US103 billion.

If these bonds can’t be rolled over, then the government will have to step in with support; if they are rolled over, payment of premium rates of 1% or more will turn the housing sector into a bigger disaster area.

In July Fannie and Freddie did almost 100% of the refinancing of less than $US100 billion in mortgage debt.

The private sector has runaway to hide and the big US banks and other lenders are cutting back every day by raising their lending standards, and seeing more and more defaults among high quality prime home loans.

Unless there is a dramatic turnaround in sentiment, judgement day is approaching rapidly for Fannie, Freddie and the US Government.

The optimists are those who continue to own the shares, which have tanked. They have no value whatsoever.

 

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The results this week of leading Australian building companies, Boral and James Hardie tell the story of the US housing slump and the damage it continues to cause.

We had another reminder overnight of the extent of the slump with new home starts for July falling once again and permits to build also dropping to a 17 year low as well.

US new home starts in July fell 11% from June to a seasonally-adjusted level of 965,000 units - slightly better than expectations, but still the lowest since 1991.

That’s 30% down on July 2007 and single home starts fell 2.9% from June as well. The 18% drop in new building permits says there will be further falls in new home starts in coming months.

That’s not good news for companies operating in the US housing sector.

Boral revealed that its US business, which generates 12% of its $5.2 billion a year in sales, slumped so badly that it helped drop overall earnings 19%. Sales in the US plunged 24% and pre-tax earnings fell from $118 million in 2007 to just $11 million in 2008.

And James Hardie revealed that first quarter profit fell 39% as the US housing crash again bit into the company’s main business, where 80% of its earnings come from.

Hardie said its net operating profit in the June quarter, (excluding costs related to compensation payment to victims of asbestos related diseases); fell to $41.6 million from $68.6 million in the same quarter in 2007.

On top of this news a number of major US retailers all reported poor quarterly profit figures, and no sign of any improvement.

Quarterly results came from Home Depot, the home improvement chain that Bunnings here in Australia is modelled on, Target, the mass discounter whose name is used by the Wesfarmers’ chain here, Saks, the luxury fashion retailer and corporate stationery group, Staples. They were all disappointing.

Saks was the worst hit: its shares fall more than 10 per cent to $10.02 after it reported a loss on softening demand for its luxury ¬clothing, shoes and accessories. Saks also predicted flat or falling comparable sales for the second half of the year.

Over the first six months of the year Saks comparable store sales have increased just 2.7 per cent, compared to the high-single digit growth it saw before the economic slowdown started to hit higher-end consumers at the end of last year.

Target’s sales and profits were both lower as it’s bigger and cheaper rival, Wal-Mart once again proved it was a better mass discounter. Home Depot expressed hopes that the bottom in housing was being reached, but said it wasn’t seeing any sign of that happening.

But the most interest comments came from Staples, the world’s biggest office and home office supplier (it just bought Corporate Express of Holland, which operates here in Australia).

Staples said it will report quarterly results below Wall Street expectations and cut its full-year outlook, sending its shares down 10%.

The company blamed weak sales in North America and Europe caused by small-business customers cutting purchases, a good indicator of how intensely the slowdown in the US, and now Europe is starting to bite.

The company also said the mortgage and housing slump was hurting home workers and small businesses especially hard.

Seven or eight US retail chains have gone bust or filed for bankruptcy protection so far this year, the latest was the Mrs Fields Original Cookie chain, which has around 300-odd stores in the US and 80 overseas, including some here.

As bad as all this news was, the big surprise was from the July figure for wholesale, or producer price inflation in the US.

US wholesale prices rose twice as fast as expected last month, rising 1.2% in the month for an annual rate of 9.8%.

It had been forecast to rise by 0.6%, down from the 1.8% rise in June. Economists cautioned that the survey was taken before the mid-month slide in oil and other commodity prices (as was the consumer price survey which showed an annual rate of 5.6% in July and a monthly increase of 0.8%, double the forecast as well).

But what really worried economist was the so-called core inflation fire for the PPI: it rose 0.7% in July, more than three times as much as the 0.2% rise in June.

The annual rate was a worrying 3.5%, the highest since 1991. If core inflation for the PPI and the CPI continues above 2%-2.5% for the rest of this year then the Fed will be under more pressure from the inflation hawks on its board, to bump rates up to 2.5%.

Economists said what troubled them was the broad spread of items which rose in the core measurement: just as there was a wide range of items which rose in the core CPI measure last week. It indicates that inflation might be more entrenched in the US than thought.

Economists do expect a slowdown to start happening from this month, but they wonder if it will take a lurch into an actual recession and a rise in unemployment above 6% to get embedded price pressures out of the system.

The Fed thinks that will happen, rather it hopes it will happen.

And next week’s second reading of US GDP will be up on the 1.9% first estimate. It’s an illusion, driven by higher exports and a smaller trade deficit!

The latest figures on industrial production for an eastern US region, and an index of leading indicators are all pointing to slowing US economic activity over the remainder of 2008 and into 2009.